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Monday, June 05, 2017

Madness But Little Method Behind Modi's Forced Demonetisation

This Russian joke helps explain the persistent government euphoria on the economic front

The demonetisation effect is visible in the falling GDP numbers. But the government says all is well.

In January, no sooner was the demonetisation period officially over, Chief Statistician TCA Anant told us,

“The growth in GDP [gross domestic product] during 2016-’17 is estimated at 7.1% as compared to the growth rate of 7.6% in 2015-’16.”

He also said the economy had weathered the volatility caused by the withdrawal of high-value bank notes in November and that it was now back on the growth trajectory.

Immediately, the full official caboodle, from the prime minister downwards to the patently ignorant party spokespersons, went to town and said the ill-effects, if any, of demonetisation were a passing blip and all was well.

What they did not say was that the data on hand was till November 2016, before that singular act of great stupidity was inflicted on the nation. This is typical of how this government uses and misuses data to create the illusion of well-being. It is now known that demonetisation cost us much more. India’s GDP growth for the last quarter of 2016-’17 financial year is officially pegged at 6.1%. It’s a huge fall from the 7.8% claimed for the previous year.

Mind you, the 2015-’16 growth factors in a deflation of 1.4%, which means the nominal GDP growth was only 6.4%. In the real world, it is nominal GDP that is more important as value addition, profits and taxes are computed as they are without adjusting for inflation or deflation.

Demonetisation was supposed to be the great big magic wand to clean up the economy, elevate revenues and put us on a higher growth trajectory. None of this happened or is happening. Cash transactions are once again the norm. According to Reserve Bank of India data, the number of digital transactions increased by 100 million to 200 million in 2014-’16. This went up to 300 million till November.

During the months of November and December, when 86% of the cash in the system was withdrawn, the number of digital transactions shot up to well over 500 million. In the first three months since currency curbs were withdrawn, the number of digital transactions fell to 350 million. This downward trajectory suggests that such transactions will hit pre-demonetisation levels soon. Tax revenue mostly went up because of additional tax collections on Seventh Pay Commission back dues.

GDP data

Gross domestic product growth is like a number on the speedometer in a car. It tells us what pace the nation’s economic train is moving at. By knowing this, we can estimate the distance to the next destination. But suppose somebody tinkered with the speedometer to get a higher reading even when at zero? Even when the vehicle is not moving, the meter will tell you it is moving, and when it is moving it will tell you it is moving faster than it actually is.

This is what the Narendra Modi regime did in February 2015. The GDP growth rate was tweaked to put India on a higher trajectory, giving itself an added 2.2% growth as a bonus. Since it was not real, it was like adding water to milk. Adding this gave us a growth of 7.4% in 2015-’16. Without the tweaking, it would have been 5.2%, in line with the International Monetary Fund’s forecast.

If the Manmohan Singh-led United Progressive Alliance government had done it a year earlier, the growth in its last year in office would have been a healthy looking 6.9% instead of the dismal 4.7% computed.

Tweaked speed on the speedometer gets caught out when speed and time cannot be reconciled with the distance travelled, and things like fuel consumption. The lack of new jobs, just 210,000 in the organised sector last year, and the falling investment to GDP ratio are some giveaways pointing to a lower speed. Regardless, the cacophony of lies orchestrated every day in the media, particularly television, try to drown out the reality, but like the mismatched readings on the speedometer and odometer (which measures the distance traveled by a wheeled vehicle), the truth cannot be hidden for long.

The 2016-’17 GDP for the fourth quarter is now officially fixed at 6.1%. Take out the 2.2% and it is actually moving at 3.9%, or around 1% below that in the last year of the Congress-led United Progressive Alliance, which had left us so despondent that 31% of the country had taken the economic prognostications of Narendra Modi and Baba Ramdev seriously to give the National Democratic Alliance a mandate to take us out of the morass.

Make-believe euphoria?

Several well-regarded economists have questioned the data the Finance Ministry and the Central Statistics Office are churning out. Derek Scissors of the American Enterprise Institute, who tracks the Chinese and Indian economies, equates the two when it comes to fudging data. In March, Scissors wrote,

“Most people from pluralist open societies want to see pluralist, open India do well. For now, however, India has the same level of economic credibility as a country like Vietnam, which publishes GDP results even before the year ends! World-beating growth? Maybe. Or maybe poorly founded quasi-propaganda.”

Even Raghuram Rajan, as the Reserve Bank of India governor, had expressed concern about GDP data collection and analysis.

True or false, the figures put out by the government reveal an even more worrisome trend. While GDP growth has slowed to 6.1%, public administration and defence have grown by 17%. These two heads are classified as part of the services sector. They account for about 15% of services, which, in turn, accounts for almost 60% of the GDP. Announcing acceptance of the Seventh Pay Commission’s recommendation of an across-the-board salary hike of 23%, Finance Minister Arun Jaitely said that it will boost demand. Didar Singh, secretary general of the Federation of Indian Chambers of Commerce and Industry, said,

“The pay hike of nearly Rs 1 lakh crore for government employees will give a strong boost to the consumer demand and help uplift the growth of the economy.”

Clearly, spending ever more on its employees is seen by this dispensation as a Keynesian pump priming of the economy (using government tax and spending to boost the economy). So what is happening here?

I have told this story before. I will say it again as its aptness to describe our leadership style has never been so exact. The Russians have a great joke on every misfortune they have to endure. One of the best I have heard is about Lenin, Stalin, Khrushchev and Brezhnev traveling together on a train when it unexpectedly stops.

Then come suggestions to fix the problem. Lenin suggests a subbotnik or day of voluntary labour so that workers and peasants can fix the problem. Nothing happens.

Stalin puts his head out of the window and shouts that if the train does not move immediately, the engine driver will be shot. Nothing happens.

Khrushchev then suggests having the rails from behind put in front so that the train can start moving. Nothing happens.

When his turn comes, Brezhnev says, “Comrades, let’s draw the curtains, turn on the gramophone and pretend we are moving!”

There is a similar air of eyes shut make believe in this government’s persistent euphoria on the economic front.

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